Estonia's house price rises are surging again

by Lalaine C. Delmendo

Estonia has low interest rates, and moderate to good rental yields. Little wonder that despite weak economic growth, during 2016 the average price of apartments in Tallinn increased 12% (9.54% inflation-adjusted) to €1,744 per square metre (sq. m), according to OberHaus. This was a sharp increase from the price rises of 3.87% the previous year. During the last quarter of 2016, apartment prices in Tallinn rose by 3.2% q-o-q (3% inflation-adjusted).

This is in line with national figures released by Statistics Estonia. The average price of Estonian dwellings rose nationally by 10.66% (9.25% inflation-adjusted) in 2016, to €1,148 per sq. m..

All of the country’s major cities experienced strong house price rises during the year 2016, according to Statistics Estonia:

In Tallinn, Estonia’s capital, the average price of dwellings purchased increased 8.74% to €1,692 per sq. m. in 2016, after a rising by 4% y-o-y last year.

In Tartu City, the second largest city and the intellectual capital of Estonia, the average price of dwellings purchased rose by 7.54% y-o-y to €1,247 per sq. m. in 2016.

In Parnu City, the country’s summer capital, located in the southwestern, the average price of dwellings purchased rose by 8.14% y-o-y to €999 per sq. m. in 2016, after rising by 15.89% a year earlier.

In Estonia excluding Tallinn, the average purchase price of dwellings rose by 9.85% to €676 per sq. m. in 2016, after an annual rise of 8.11% in 2015.

A short history of the Estonian property cycle

Estonia’s housing market was in continuous boom from 2000 to 2007, with house prices nationwide rising by 36% annuallyfrom 2004 to 2006. This was due to the following factors:

low interest rates

low inflation

strong economic growth

rapid wage increases

huge foreign demand for property, especially from other Europeans

Demand for properties in Tallinn reached an all-time high in 2006, with foreigners attracted by the city’s potential. Tallinn accounted for more than half of all real estate transactions in Estonia.

The average price of 2-room flats in Tallinn rose by 448.7% from 2000 to 2007, in Tartu prices rose 431.5% and in Parnu 440%. Prices of three-room flats were equally impressive, rising 412% in Tallinn, 481% in Tartu, and 471.5% in Parnu.

Meanwhile owner-occupancy rates rose strongly, up from 85% in 2002, to 96% in 2004. The rental market shrank from 12% of households (with 9% privately renting and 3% in social rents) in 2002, to just 4% in 2004.

Then came the crash. Estonia´s house price falls in 2008 were among the biggest in the world, rivaled only by Latvia. Prices of dwellings started to fall nationwide in 2007, partly due to the global financial meltdown:

In 2007, house prices dropped by 1.5% (-9.7% inflation-adjusted)

In 2008, house prices plunged by 18.3% (-24.5% inflation-adjusted)

In 2009, house prices plummeted by 30.5% (-29.1% inflation-adjusted)

After these 3 horrendous years recovery began in the second half of 2010, with the average price of dwellings rising modestly by 4.1% (-1% inflation-adjusted).

Land prices in Tallinn rose modestly by 3.5% in 2016 from a year earlier, from a y-o-y rise of 6.2% in 2015, according to OberHaus.

Property demand continues to rise

In 2016, the number of purchase-sale contracts stood at 47,369 units, up by 2.02% from a year earlier and the highest level since 2007, according to Statistics Estonia. Likewise, the value of contracts also increased 3.45% to €2.85 billion over the same period.

During 2016:

In Tallinn, the number of purchase-sales contracts increased 6.8% while the value of contracts rose by 9.3%.

In Tartu, the number of purchase-sale contracts was almost unchanged while the value of contracts increased 2.9%.

In Parnu, the number of purchase-sale contracts rose by 11.4% while the value of contracts surged 21%.

Moderate to good rental yields

Gross rental yields from apartments in Tallinn are moderate to good, ranging from 5.3% to 6.3%, according to Global Property Guide research. This was supported by OberHaus, whose research finds that gross rental yields of apartments in Tallinn in 2016 ranged from 5% to 5.5%, depending on location and the quality of the property.

In 2016, rents for apartments in Tallinn increased slightly, amidst the increase in the supply of modern apartments, according to OberHaus. By end-2016, the asking price for rental apartments in the city center was €10 per sq. m. and €8 to €9 per sq. m. in the suburbs of Tallinn, according to OberHaus. The average rent for one- to two-bedroom furnished apartments in the city centre ranges from €430 to €530 per month in 2016.

Construction activity increasing

After the break-up of the Soviet Union in 1991, housing construction in Estonia dramatically decelerated.

From 1996 to 2001 less than 1,000 dwellings were added to the dwelling stock annually - not enough to meet demand. Most apartments were sold before completion.

However, dwelling completions plunged 25% y-o-y to 5,300 units in 2009. From 2010 to 2013, dwelling completions averaged just over 2,000 per year.

Residential construction bounced back starting 2014, with dwelling completions rising by 32.5% y-o-y to about 2,800 units. In 2015, dwelling completions soared 44% to 3,969 units from a year earlier.

Then in 2016, dwelling completions surged again by 19.2% from the previous year, to 4,732 units. Likewise, building permits rose by 7.7% y-o-y to 6,021 units over the same period.

Mortgage market expanding

The house price boom was supported by a massive expansion of the mortgage market, growing by an average of 62% yearly from 2002 to 2006. After 2007, the mortgage market collapsed.

In 2014, housing loans outstanding rose by 2.85% from a year earlier, and total value of outstanding housing loans has risen by 4.27% in 2015 and by another 5.34% in 2016, based on figures from the Bank of Estonia.

In February 2017, the value of housing loans outstanding rose by 5.65% to almost €6.7 billion from the same period last year.

The size of the mortgage market is currently equivalent to 31.7% of GDP.

Interest rates continue to fall

In January 2011, the euro became the official currency of Estonia. Interest rates in Estonia follow key rates set by the ECB.

In September 2014, the ECB slashed the key rate to a record low of 0.05%. In March 2016 the ECB cut the key rate to zero.

As a result, the average interest rate for housing loans in Estonia declined slightly to 2.19% in December 2016 from 2.21% a year earlier, according to Statistics Estonia.

Modest economic growth, rising unemployment

Estonia’s economy is projected to expand by a modest 2.5% this year and by another 2.9% in 2018, according to the International Monetary Fund (IMF).

From 2000 to 2006, Estonia’s economy expanded by an average of 8% annually, including resounding 10.4% GDP growth in 2006, and 9.5% growth in 2005. In 2007, GDP growth was 7.9%, one of the highest growth rates in the EU. Unemployment fell from 13% in 2000, to just 4.6% in 2007.

The economy contracted by 5.4% in 2008, and by a staggering 14.7% in 2009. The economy recovered in 2010 with GDP growth of 2.5% and a fiscal budget surplus. Estonia had astounding growth of 7.6% in 2011, with strong exports. Unemployment fell to 12.3%. Then in 2012, the economy expanded by a robust 5.2%, bolstered by construction and export growth.

However, the economy slowed sharply in 2013, with real GDP growth rate of just 1.6%, mainly due to weak exports and rising inflation. It grew by 2.9% in 2014 and by just 1.1% in 2015, mainly due to a sharp slowdown in the electronics sector and shale oil sector, and a decline in demand from neighboring Russia.

In 2016, Estonia’s economy expanded by a very modest 1.6%.

As a result, the unemployment increased to 6.8% in 2016, from 6.2% in 2015, according to Statistics Estonia. The jobless rate is projected to increase further to 7.9% this year and to 8.7% in 2018, as reforms encourage pensioners to reenter the labor market, according to the European Commission.

In 2016, the average monthly gross wages and salaries rose 7.6% to €1,146 from a year earlier, according to Statistics Estonia. Yet inflation remained low at 0.5% in 2016, from 0.07% in 2015, 0.5% in 2014, 3.2% in 2013, 4.2% in 2012, and 5.1% in 2011, according to the IMF.

Consumer prices are projected to increase by 2.8% this year as well as in 2018, according to the European Commission.

The country has lowest national debt level in the European Union, at just 9.5% of GDP last year. In 2016, Estonia registered a government surplus of 0.3% of GDP, according to Statistics Estonia.